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Friday, September 22, 2006

Mortgage Bankers Association Celebrates Exotic Mortgages

Robert Broeksmit of the Mortgage Bankers Association defended exotic mortgages. "I strongly believe the market's success in making these nontraditional products available is a positive development, not a cause for alarm,"

It is disgusting that the Mortgage Bankers Association is busy celebrating their toxic mortgages. They should be very alarmed by these ticking time bomb loans.

35 comments:

With home prices set to move even lower as inventory is reduced, and monthly payments set to rise as mortgage rate resets kick in, more and more homeowners are in danger of delinquency, suggesting more widespread foreclosures. As you can see in the chart below, housing affordability has been in a free fall.

Delinquencies lag affordability, but note the big subsequent surge in delinquencies after affordability sank in 2000–2001. Affordability is much worse today than it was during the last recession, in 2001, while household debt payments have jumped to nearly 14% of disposable income, an all-time record. With home prices and mortgage rates receding, there is hope for a bottom in affordability. But given the lagged effect, a rise in delinquencies may already be baked in the cake.

Banks may be at risk as well, as they have become steadily more dependent on residential real estate loans. As seen in the chart above, residential real estate loans as a percentage of total bank loans have surged from about 23% in 1999 to about 31% today.

I am confident that in the aftermath of this downturn the proliferation of these new mortgage "products" will be recognized as one of the primary contributors to the unjustified run up in prices.

There is a clear correlation between the use of more "exotic" and risky mortgages and decreasing levels of affordability in bubble markets.

The further above an affordable level the markets rose the more people were driven to make their purchases with these loans, not because they were sophisticated investors, but because there was simply no other way to make a purchase.

Within DC proper the use of interest only loans peaked above 55% of total purchases as per the most recent data I have seen. Without a doubt some of those purchasers were savvy investors who understood the risks associated with their decision, but the overwhelming majority of those relying on exotic loans were doing so because there was simply no other way they could afford to "buy" a house.

In previous bubbles the inevitable decline has come when affordability forced price growth to stop. This makes the market unattractive to speculators and they leave the market. Mentalities shift, prices stagnate or drop slightly, and then eventually prices start to rise again.

The problem with the exotic lending products is that in this bubble when affordability was maxed out instead of the market experiencing a normal correction, which would probably have been in 2004, the market continued to accelerate as more and more purchasers utilized exotic loans to enter the market. This has significantly increased the upward side of the bubble's growth and in my assessment will contribute to an unusually sharp downward slide.

The use of interest only loans was WIDELY justified on the grounds that with housing prices rising as fast as they were the most important thing was to simply get into the market. (this is Lance and VA_Investor's favorite "buy or be priced out forever" line)

I don't doubt that there were some honest lenders who were not relying on such scare tactics to sell these products, but the truth is that a huge number were. After all... when it comes time for the loan payments to balloon you can simply refinance or sell right?

What we are going to see over the next couple years is the truth behind the saying... "There is no such thing as a free lunch." With housing prices falling instead of rising large numbers of homeowners will be forced into bankruptcy. This happens every time a market falls, but it will be more pronounced this time as a result of the unusual extent of the bubble and the exotics loans that have financed it.

The home owners will not blame their own bad judgment of lack of foresight... they will blame the loans, and I predict that the media will as well.

Over the next couple years the media will hammer home the message to anyone who will listen what a mess these loans got people into and the popularity of these loans will drop as it becomes "common knowledge" that exotic loans are a bad idea.

This will force home prices even lower as without the widespread reliance on these loans a lower price level will have to be established.

What are we going to see in this area?

In the short term, the next 12 months, I expect a continued sharp decline in prices. We are currently somewhere around -8% YoY but that will get worse as this fall selling season goes on. I expect this fall/winter will be the period when prices will decline the fastest.

Sometime after the next spring season I expect things will have stabilized and that while some areas will still decline, the decline will be much slower and more orderly. As always Condos and the outer suburbs will be hit the hardest. I think over the next five years median prices in this area will drop 30-45% with about half of that coming from inflation. Following that period another 5 or so years of a stagnant market would normally be expected but I am not going to pretend to be able to see that far out as inflation, the economy and everything else plays a role in that.

"I personally do not recommend any buyer or someone refinancing to get anything less than an interest only loan with a rate locked in at least 5 years. 7 or 10 years is best."

You would. You're a realtor. But that's the most insane advice I have ever heard. I am almost speechless. With that kind of thinking you are going to lead a lot of people into loans that were not meant for them. Interest only??? So, build up NO equity unless you are banking on appreciation, which, unless you are deaf and blind, is at 0% or sliding in many areas of the country? And it's WORSE for condos, making your advice even crazier.

I believe most first time homebuyers will sell their home within 5 years. Especially those who purchase condos.

Yes, especially now that liquidity is drying up! I'm sure there will be PLENTY of buyers in five years, when anyone buying now will have to bring a check to the closing of their next escrow if they want to unload their house.

Mr. Johnson, you are a miserable troll and the fact that you've come to this blog to drum up business shows how desperate the situation must be in your market at this time.

Just out of curiousity...where are you and all the other realtwhores going to be when all of these toxic loans are resetting and your former, now bankrupt, clients are calling you on the BS you fed them to get them into them in the first place?

"I believe most first time homebuyers will sell their home within 5 years. Especially those who purchase condos".

just cause you believe it does NOT make it so.

i was upside down for 9 years on my first home and couldn't refi out of a 9.75% mortgage, i angers me to know that people WILL be in the same boat only this time they will NOT be able to refi out of a IO ARM (that is resetting and they can not afford) into a fix rate that they can't afford.

all because realtors like you spread this BS and miss information just so you can keep the party going a bit longer and make another commision

If they bought their home, whether it be a condo or not, during the height of the recent real estate price run up, then they may be set up to lose a lot of money if they sell even in five years. I think that's the point. These exotic loans wouldn't be so toxic if the prices of the homes were in a position to go up. As it looks to me they're going down.

no question that the real estate industry and the brokerage industry will take a major fall for the coming debacle. if i were a realtor i would not be advertising it at this time. there are and there will be more unhappy trapped home owners out there...

If people made bad decisions using loan instruments inappropriately, let's not blame the loan instrument ... and by implication, stop making those loan instruments available for the responsible buyer. Life's not easy ... You gotta do some thinking along the way. I personally don't want a big brother government around telling me it's going to protect me from myself. Have you all ever heard of Darwinism? Well, if so fools have actually lied to get a loan they won't be able to afford when the loan resets or the interest rate changes, then I have little pitty for them. And yes, I said "lied". Let's not forget in this discussion that people get approved for "worst case scenarios" when they take out a loan ... any loan ... including ARMs, I/O, and no docs. And let's not say "the loan officers lied", "the real estate agents lied" ,etc. The BORROWER is the one that signs on the dotted line. I always DEMAND a copy of the settlement sheet at least 24 hours before going to settlement .. .and when they invariably tell me that they won't have the final figures until that morning, I ALWAYS respond with "then we'll need to move the settlement day back since I will NEVER come to a settlement without knowing EXACTLY what I am committing myself too." Yeah, it's easy to blame others for your own foolishness ... Just don't make it so that we all have to live in a nanny state because some of us expect someone else to be looking out for us. I can look out for myself, thank you.

When we talk about exotic loans, I'm thinking option arm mortages. I have a 7 year interest only loan on my own home. I have faith in the market and the long term success of being a homeowner. I tell every buyer I sell a home to is to make improvements to the property every year and also to think long term - at least 5 years before selling. I value my relationships with my clients and put them first.

I have never sold a home to a buyer with an option arm mortgage. I do not recommend it.

I think it's the former. The voice on his site is a very young fella's voice. I think that I/O at this stage is just renting, only at too high a price and in handcuffs. Straight rents are a lot less, virtually everywhere, that I/O payments plus taxes, even after factoring in the amount by which the homeowner's deduction exceeds the standard deduction. Honest agents should first help their clients assess whether or not buying, verus renting, is in their interest at all at that time.

Nevertheless, I don't think Richard came here to be a troll, unless this is a repeat visit. If he returned time after time and hammered away, after seeing these rebuttals, that would be trolling, IMHO.

For many of us, these "ticking time bomb loans" are fabulous. If you're an educated consumer and you take the interest you'd be paying and diversify it, say, into 10 homes in 10 markets, your chances of losing your money go down and your ability to earn money go up!

These "toxic mortgages", as you call them, can be great for educated consumers. If you take the money you would be paying in interest and spend it diversifying into many areas and many homes not only do you stand the greatest to gain, but you minimize your chance of loss!

The Suicide Loans are the difference between "Bubble?" in 2003 and "Bubble!!!" in 2005. They are the ONLY thing that allowed a significant number of first time home-buyers to enter the market after interest rates bottomed out in 2003. PAYMENTS for a median home were relatively flat to 2003 when financed with a sane mortgage despite rising PRICES because of falling interest rates.

However,prices continued to rise. There was a combination of people "doubling down" in the housing market by using equity to purchase second homes, and feerful first time homebuyers, afraid of being "priced out forever" taking increasing risky loan products. These suicide loans enabled 2-3 years of extra bubble inflation

Lance for once I couldn't agree with you more. Excellent post, the one thing I am afraid of is the government bailing out all of these idiots who got in over their head. With the laws in this area, I think it is a strong possibility. Mandatory bike helmet laws, life preserver laws, etc. It might as well be the socialist republic of maryland! STOP saving people from themselves!

"Have you all ever heard of Darwinism? Well, if so fools have actually lied to get a loan they won't be able to afford when the loan resets or the interest rate changes, then I have little pitty for them. "

Get educated my friend. Social Darwinism has been discredited for a long long time.

http://en.wikipedia.org/wiki/Social_Darwinism

The fact of the matter is that the average consumer simply has a poor understanding of relatively complex financial decisions. By mass promoting these exotic loans as a solution to overpriced housing markets unethical lenders hae set up thousands of well meaning, but under informed, customers up for a serious financial hit. The good news is that those same lenders are going to take the hit right along with them as the default rates on those loans soar. The exotic mortgage craze was a result of the housing bubble. The housing bubble was fed by the exotic mortgage crazy. The problem was feeding itself.

I think in the long run lenders will tighten their standards when issuing exotic mortgages to protect themselves from the greater risk associated with those loans. I also think consumers will also become more educated simply from hearing the horror stories from those who got screwed by an exotic mortgage.

Finally... while I am no fan of a nanny state, some of the lending practices that have been reported really should be criminal in my opinion.

"The Suicide Loans are the difference between "Bubble?" in 2003 and "Bubble!!!" in 2005. They are the ONLY thing that allowed a significant number of first time home-buyers to enter the market after interest rates bottomed out in 2003. PAYMENTS for a median home were relatively flat to 2003 when financed with a sane mortgage despite rising PRICES because of falling interest rates. "

That is exactly what I believe happened Jim. (check out my post above)

In a normal cycle the bust would have come sometime around 2004 as the affordability forced the market to stop its growth. Instead of a normal stagnation in the housing market, what resulted was an ever greater boom as more and more and more buyers raced into the market using more and more "exotic" loans.

This of course let the hype just continue to expand and more and more amatures turned into speculators in the last couple years of the bubble. Huge building projects were launched at a time when it was almost impossible to lose money so long as you were building housing. Now all of that is coming screaching to a hault and over the next two years thousands of new condos will land on the market even as prices fall...

With nearly 60% of all loans issued in the district at the peak being interest only loans I think there are some hard times ahead.

Of course here I am assuming that there is no "new paradigm" emerging meaning that what we are seeing isn't really subject to fundamental economic behaviors...

We all pay when mass hysteria induced by greedy mortgage companies and other speculative investors throws the whole market into the crapper. Smaller government is nice, but not when it's going to cost me more of my hard-earned dollars to clean up the mess.

Here's a question. How does mortage insurance enter into this? If the loan defaults, the insurance company moves in to pick up a falling asset. Does this squash the owner's credit ratings? Anything negative go back against the bone heads who made the loan?

Anonymous said... "We all pay when mass hysteria induced by greedy mortgage companies and other speculative investors throws the whole market into the crapper. Smaller government is nice, but not when it's going to cost me more of my hard-earned dollars to clean up the mess.'

Anon, You've hit on why the whole "bubble" thing is pure wishful thinking on the part of people who'd rather have a hand-out than a hand up. Government isn't going to step in and force the market to do something to which it isn't already prone. The market is going to do what it has alway done. Prices begin to drop (as is already occuring) and then a game of chicken starts up between all the people who have been on the sidelines waiting for the price. Old allies suddenly become your newest advarsaries! Suddenly, you are looking around and saying to yourself "I wonder why David doesn't 'moderate' comments on weekends ... Could he be out there at Open Houses looking? Could good old Neil or Redskins be pulling their pennies together and getting ready to bid on that same house I wanted?" In the end, someone will blink, and the mass excitedness so evident in your tone of writing on here will quickly translate into a mass excitedness of seeing if you can beat out "the other guy" for that great deal out there! Now the fun begins ... I'm going to enjoy watching as you all rush out there and beat the prices back first to where they were a year ago ... and then,much, much higher! This is going to be fun! :)